Driven by a host of factors, including rising incomes, tradition, a more unpredictable overall economic environment and preference for portable assets, gold-investment demand in China is expected to rise anywhere from 10-30 percent this year, depending on estimates, making it the world's largest gold market and toppling long-time leader India. According to Albert Cheng of the World Gold Council, Chinese gold demand hit a record high in the first quarter of this year, and may reach 1,000 tons this year, the WGC has said, up from 769.8 tons last year. Conversely, Indian demand this year is expected to see a drop this year, from 800-900 tons, down from last year's 933.4 tons. As the BBC recently noted, Indian demand was hit by a rise in the import duty on gold and a new excise duty on gold jewelry, which saw jewelers go on strike and eventually force the government to drop the measure.
As investors look for a haven from the ongoing European debt crisis and the possibility of weakening currencies, the Industrial and Commercial Bank of China Ltd. (ICBC) told Bloomberg this week that Chinese buyers, facing lackluster equity markets and property curbs, are looking more to the metal in 2012. “Investors here want to hold part of their assets in gold to hedge for the risks, especially now that the financial crisis has evolved into a sovereign crisis,” Zheng Zhiguang, general manager of the precious-metals department at ICBC, said in an interview in Shanghai.
This rise in Chinese demand is a welcome development for the gold industry, which has seen a drop in prices since last year as investors have turned to the US dollar as a relative safe haven amid concerns in the Eurozone about Greece potentially quitting the Euro. As the World Gold Council wrote in a report this week, global gold demand dropped 4.6 percent to 1,097.6 tons in the first quarter of this year. Gold prices, as of yesterday, sat at US$1,526.97 an ounce, the lowest level since last December.
As Cheng of the World Gold Council said yesterday in Singapore, “We are confident China will become the largest source of demand for gold this year," adding, "Over the next two to five years, China and India will go neck to neck and may account for more than 50 percent of world demand.”
Demand in China totaled 255.2 tons in the three months to March 31 from 232.5 tons a year earlier, the council said in the report. Investment demand gained 13 percent, while jewelry demand increased 7.9 percent to 156.6 tons, making China the world’s largest jewelry market for a third quarter.
The council’s outlook for increased consumption in China this year contrasts with the view from Lao Feng Xiang Co., the mainland’s biggest gold-jewelry maker, which said this month the country’s demand growth may stagnate in 2012.
“The increasing wealth of the middle class is very important in China,” Cheng said. “In the past 10 to 15 years, it had reached first- and second-tier cities such as Beijing, Shanghai and Hangzhou. We expect such wealth to reach 600 million people in third-tier cities such as Dongguan, Zhuhai, Mianyang and Tangshan.”
A traditional investment and hedge against inflation, gold has been a popular investment option in China for centuries. (With the notable exception of much of the 20th century.) Already, growing demand in China has benefited companies working in the gold jewelry field, with China becoming the world’s largest market for gold jewelry in the second half of last year. By 2015, China will have become the world’s largest luxury market, and the country’s appetite for gold bars, coins and other gold-backed products — as with most luxury categories — has been pushed by pragmatic concerns about rising inflation, a limited number of investment options, and a strengthening yuan.